You have an outstanding employee that is very loyal to your organization and you are paying then at about 50% below their true value to the company... Along comes a new company that sees that value right away and makes them an offer that is right at their true value... What would you do, counter or let them go?

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To answer this question I need to know why I am paying them half of their "market" value? Have I been taking advantage of this person because there were no other competitors for his/her skills? Did I move them over from a different department, train them in a new skill and keep them on their old pay scale?

I guess I'm just thinking I need more info before I can say. I am not dead-set against COs but do not feel they should be a standard part of a company's retention plan.
I have heard that 1 great employee is better than 10 average ones, I happen to agree- so if you deem this person "outstanding" you need to counter and now that you know the market- protect your other "outstanding" personnel, maybe even "trim the fat" to keep P&L in check.

On the other hand - You have major damage control at this point- paying people that far below the true value AND it takes them leaving before you pay up is going to create at a minimum some distrust and it maybe irreversible- and they will eventually leave.

I hate to seem so so wishy washy, but there is no set answer without more particulars and knowing the situation, it should have never gotten to that point I suspect though- but failure is a far greater teacher than success....now you know - now you grow!
You let them go. Your company needs to learn how to retain good employees too and your employee needs to learn new things. Plus, it give you something to do in these slow hiring times.
If this person is working for half pay and loving it, then they are not the smartest person to begin with. Loyalty or not, being intelligent is part of being a good (or outstanding) employee.

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